The Effect of Governance Reforms on Financial Reporting Fraud
66 Pages Posted: 29 Aug 2012 Last revised: 15 Feb 2016
Date Written: August 2015
In response to financial reporting scandals, Congress and the securities exchanges mandated increases in board and audit committee independence and banned most non-audit services. We exploit these exogenous shocks to examine whether these governance reforms reduced financial reporting fraud. Comparing firms forced to comply with the reforms to firms already in compliance, we find that mandated increases in overall board independence significantly reduced the rate of fraud, while mandating a fully independent audit committee had a weaker effect. Further, banning non-audit services did not reduce the incidence of fraud.
Keywords: Fraud, Sarbanes-Oxley, Corporate Governance, Board Independence
JEL Classification: K22, K41, M41
Suggested Citation: Suggested Citation